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US economy weathers storms

US economy weathers storms

  • 01Nov 17
  • Paul Diggle Senior Economist, Aberdeen Solutions

The US economy expanded by 3% in the third quarter. Our ‘nowcast’ suggests that underlying growth is even stronger still.

The recent extreme weather in the US may have been destructive, but it has failed to make a serious dent on the economy. Figures released last week show the US expanded by a faster-than-expected 3% annualised in the third quarter, albeit this is down fractionally compared to the second quarter. Consumer spending, business investment, exports, and inventories all made positive contributions, while residential investment was a drag. The expansion marks the first two consecutive quarters of US growth above 3% for over three years.

According to our real-time ‘nowcast’, the US economy is currently growing at a 4.1% annualised pace in October.

Moreover, our real-time ‘nowcast’ show that underlying economic activity may be even stronger than the official figures suggest. The US ‘nowcast’ aggregates a wide range of the latest economic data, applies a variety of statistical filters, and extracts underlying economic activity. According to this measure, the US economy is currently growing at a 4.1% annualised pace in October. The figures indicate that hurricanes Harvey and Irma were only a temporary setback for the economy and that activity has rapidly bounced back since. Underlying growth has improved from a low of 2.3% at the start of 2016, when fears that the US economy was permanently stagnating were rife.

The discrepancy between the ‘nowcast’ and official data is probably because the ‘nowcast’ is based on real-time, ‘hard’ economic data like retail sales, housing starts, industrial production, and initial jobless claims that are all driven by underlying economic activity. By contrast, the official GDP figures are published on a quarterly basis with a six-week delay and are influenced by the changing seasons, the level of businesses inventories and other one-off factors that are difficult to predict. They are also often revised as additional data become available.

The ‘nowcast’ suggests that there is scope for the third-quarter official GDP estimate to be revised upwards over time, and that the fourth quarter number should also come in strong. Economic growth could receive even more of a boost if President Trump is successful in passing tax cuts later this year or early next.

Strong economic growth supports the case for raising interest rates in December and several more times next year.

Strong US economic growth supports the case for raising interest rates in December and several more times next year, whoever is the Chair of the Federal Reserve. Admittedly, the missing piece of the puzzle continues to be inflation. Core personal consumption expenditure (PCE) inflation was 1.6% in September. The ‘core’ measure, which strips out volatile food and energy prices, was just 1.3%. Both measures are well below the Federal Reserve’s 2% target.

But with the economy expanding well in excess of its trend growth rate of around 2%, spare capacity is being used up. That should eventually translate into higher inflation – provided the much-discussed Phillips curve relationship still holds – and the Fed is likely to act in anticipation of future inflationary pressures.

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